Auto firms to report muted Q1 earnings on high raw material prices

Automakers are expected to report muted earnings for the June quarter as against the previous one because high input costs and supply-chain constraints have dented profitability, show earnings estimates based on a Bloomberg poll of analysts.

The earnings are not comparable with the year-ago quarter, which faced pandemic-induced nationwide lockdowns owing to the Delta wave.

Analysts expect companies to fare better in the September quarter (Q2 FY23) as moderation in prices of raw materials starts having an impact. Additionally, with semiconductor availability easing, automakers are ramping up production to curtail the waiting period for their models. This too will bode well for the sector amid strong demand in the passenger vehicle segment. However, an increase in the cost of borrowing could have some impact on demand.

Incremental raw material pressure easing during Q1, coupled with price hikes (1.5-2 per cent) across automakers, may result in aggregate gross margins expansion by the second quarter of FY23, according to a recent research report of YES Securities.

At an aggregate level, the net profits of auto companies (including Maruti Suzuki, Mahindra & Mahindra, Tata Motors excluding JLR, Bajaj Auto, TVS Motor Co, Hero MotoCorp, Ashok Leyland, Eicher Motors, and Escorts Kubota) are expected to crimp by 29.2 per cent quarter-on-quarter because prices of raw materials, including copper, aluminium, steel, and precious metals, remained firm.

Among the firms mentioned, Hero MotoCorp, Mahindra & Mahindra, and Escorts Kubota, which have benefited from a recovery in rural demand, are expected to be star performers. While net profit at Hero is expected to rise 22 per cent, for M&M it is anticipated to increase 18 per cent quarter-on-quarter. At Escorts it’s estimated to jump 27.5 per cent. Car market leader Maruti Suzuki, Bajaj Auto, and Ashok Leyland are expected to see their profits crimp quarter-on-quarter.

In a recent earnings preview report, Jinesh Gandhi, analyst at Motilal Oswal Financial Services, wrote after the last three quarters of year-on-year decline in EBITDA (earnings before interest, tax, depreciation, and amortisation) margins, the brokerage estimates margins to improve on a YoY basis by 140 basis points for the auto companies under its coverage. This will be driven by operating leverage despite increase in raw material cost. Except Hero MotoCorp and M&M, all other automakers are likely to report a sequential erosion in margins, wrote Gandhi.

While the prices of some metals showed signs of softening quarter-on-quarter, they remained at an alleviated level when compared to FY21. For instance, aluminium prices cooled to $2,882 a tonne in Q1 FY23 from $3,226 in Q4 FY22. But it’s still off the mark seen in the preceding quarters of FY22, when the prices hovered in the range of $1,525 to $2,763 a tonne, industry body Society of Indian Automobile Manufacturers said in a quarterly presentation on Wednesday.

A similar trend is seen in zinc, nickel, and copper prices. Meanwhile, the prices of precious metals, which have seen a sharp spike in the past one year, have also seen only a minor dip quarter-on-quarter. While rhodium prices, which shot up 99 per cent in the last year, climbed down to Rs 40,371 per gram, palladium, which rose 7 per cent, has seen prices moderate to Rs 5,276 per gram Rs 5,683 per gram.